FORTRESS STAR LTD v. TONG HOK MAN AND OTHERS

LDCS 8000/2017

[2019] HKLdT 18

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 8000 OF 2017

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J U D G M E N T

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Background

1.  This is an application (“the Application”) for compulsory sale of all the undivided shares of and in the subsection 7 of section A of Hung Hom Marine Lot No 1 (“Lot 1”) and subsection 4 of section A of Hung Hom Marine Lot No 1 (“Lot 2”) (and where appropriate collectively referred to as “the Lots”), together with 2 adjoining buildings each of 8 storeys erected thereon known as Nos 79-81 Baker Street & Nos 23-25 Whampoa Street (“Building 1”) and Nos 27-29 Whampoa Street (Building 2) (and where appropriate are collectively referred to as “The Buildings”) respectively for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  Building 1 comprises an 8-storey Chinese tenement block that is served by 2 common staircases. Its occupation permit (“OP”) No K10 was issued on 23 February 1957 granting permission to occupy ground floor (“G/F”) for non‑domestic purpose and upper floors for domestic purpose.  According to the approved building plans approved on 18 August 1956, there are 4 shops (i.e. No 79 Baker Street, No 81 Baker Street, No 23 Whampoa Street and No 25 Whampoa Street) planned on G/F and 3 flats (i.e. Nos 79-81 Baker Street and Nos 23-25 Whampoa Street) planned on each of 1^st Floor (“1/F”) to 7^th Floor (“7/F”).  According to the approved alteration and addition plan dated 6 July 1957, the use of G/F of No 81 Baker Street was changed from shop (non-domestic) to cafe shop (non-domestic). The upper floors have also been subdivided into 3 flats each, being Nos 79-81 Baker Street, and No 23 Whampoa Street and No 25 Whampoa Street.

3.  Building 2 also comprises an 8-storey Chinese tenement block that is served by 2 common staircases. Its OP No K5 was issued on 28 December 1956 granting permission to occupy ground floor (“G/F”) for non‑domestic purpose and upper floors for domestic purpose.  According to the approved building plans dated 7 August 1956, there are 3 shops (i.e. No 27 Whampoa Street, No 27A Whampoa Street and No 29 Whampoa Street) planned on G/F and 3 flats (i.e. No 27 Whampoa Street, No 27A Whampoa Street and No 29 Whampoa Street) planned on each of 1^st Floor (“1/F”) to 7^th Floor (“7/F”).

4.  At the commencement of the Application on 8 August 2017, the applicant owned 84.0% of the undivided shares in Lot 1 and 87.5% of the undivided shares in Lot 2.

5.  After the commencement of the Application, the applicant successfully acquired additional undivided shares from the 1^st respondent, 2^nd respondent, 5^th respondent and the 2^nd named 7^th respondent. Notices of Discontinuance against them have been filed and registered in the Land Registry against the relevant units in the two buildings.

6.  Thus, as at the date hereof, the applicant owns 92% of the undivided shares in Lot 1 and 98% of the shares in Lot 2.

7.  There are now 3 live respondents remaining record, namely the 3^rd respondent (“R3”), the 4^th respondent (“R4”) and the 1^st named 7^th respondent (“R7”). Their respective properties and undivided shares are summarised below:

R	Undivided shares owned by live respondents	Property owned by live respondents
R3	1/25th share in Lot 1	1/F, No 23 Whampoa Street
R4	1/25th share in Lot 1	5/F, No 23 Whampoa Street
1st named R7	½ of 1/24th share in Lot 2	Half share of 1/F, No 29 Whampoa Street

8.  According to the applicant, the 3 live respondents are missing. Substituted service of the Application on them was effected on 15 August 2018 pursuant to the Order of the Tribunal dated 9 August 2018. No one has shown up after the expiration of the 1-month period as specified in the notices.

9.  Pursuant to section 3(4) of the Ordinance and paragraphs 2 and 3 of the Order dated 9 August 2018, after expiration of the 1-month period (ie on 14 September 2018), all persons claiming to be the minority owners of the Lots 1 and 2, R3, R4 and the 1^st named R7 shall be bound by the proceedings herein as if they have been served with a copy of the Notice of Application (“the NOA”) in accordance with section 3(3)(a) of the Ordinance.

10.  The Tribunal have also ordered that service of the Application and all documents subsequent to the Order dated 9 August 2018 in respect of these proceedings on R3, R4 and the 1^st named R7 be dispensed with.

Section 3 of the Ordinance – Ownership of the applicants

11.  Whereas section 3(1) of the Ordinance requires the applicants to have not less than 90% of the undivided shares in a lot before they can make an application, section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice.

12.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”). Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%. Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date;”

13.  As mentioned, the OP for the Buildings were issued not less than 50 years before the date of the Application, the Notice is applicable and the threshold percentage should be 80%.

Determination of the EUV of the units

14.  Under section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B)  not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

15.  The NOA was accompanied by a valuation report dated 3 August 2017 (“Application Report”) of Wong Chi-Wai (“Mr CW Wong”) of Grandmax Surveyors Limited. Mr CW Wong is a Registered Professional Surveyor (General Practice Division) and a member of the Hong Kong Institute of Surveyor and the Royal Institution of Chartered Surveyors.

16.  Mr CW Wong set out in the Application Report his assessment of the EUV of each unit in the Buildings as at 27 June 2017. The report was prepared not earlier than 3 months before the filing of the Notice of Application in accordance with section 3 of the Ordinance.

17.  Mr CW Wong updated his EUV assessment by a supplemental report dated 15 January 2019 (“the Supplemental Report”). He inspected more units of the Buildings and took into account the updated property index prepared by the Rating and Valuation Department. He also took into account more domestic and retail comparable transactions.

18.  Mr CW Wong explained in his report the method of valuation as well as the process of his assessment.

19.  He adopted the following methodology to assess the EUV of the domestic units of the Buildings:

(a)   He selected the domestic unit on the 3/F of No 29 Whampoa Street, which was situated on the middle floor of the domestic portion of the Buildings, as the reference unit for the purpose of assessing the unit price (“the Reference Domestic Unit”). 

(b)   The unit price of the Reference Domestic Unit was assessed by making reference to market comparables.  He took into account 9 comparable transactions in 8 different buildings nearby.  After making what he regarded as the necessary adjustments (for location, floor, time, building age, view, size and lighting & ventilation), he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Domestic Unit (at $78,000/sq m).

(c)   He then compared the floor difference, size, view, lighting & ventilation and internal condition of the Reference Domestic Unit and the other domestic units within the Buildings to arrive at the EUV of all the domestic units[1]. He arrives at a total EUV of $203,044,000 for the domestic portion.

20.  In assessing the EUV of the shop units on G/F, Mr CW Wong adopted the following methodology:

(a)    He selected the shop on G/F, No 29 Whampoa Street as the reference unit (“the Reference Shop Unit”).  He then took into account 6 comparable transactions in 6 different buildings nearby. After making what he regarded as the necessary adjustments (for location, layout, size, frontage, return frontage, headroom, time and building age), he took the average of the adjusted unit rate of the comparables to come to the unit price of the Reference Shop Unit (at $396,000/sq m).

(b)   He then used the unit rate of the Reference Shop Unit to assess the other G/F units, arriving a total of $126,829,000[2].

21.  The total EUV of the Buildings is therefore $329,873,000:

Address	Floor	EUV
79 Baker Street	G	$18,258,000
81 Baker Street	G	$14,154,000
23 Whampoa Street	G	$29,724,000
25 Whampoa Street	G	$20,475,000
27 Whampoa Street	G	$18,640,000
27A Whampoa Street (a rear shop)	G	$6,938,000
29 Whampoa Street	G	$18,640,000
	Sub-total:	$126,829,000
81  Baker Street	1	$5,103,000
23 Whampoa Street	1	$6,962,000
25 Whampoa Street	1	$4,896,000
27 Whampoa Street	1	$4,928,000
27A Whampoa Street	1	$4,488,000
29 Whampoa Street	1	$4,928,000
81  Baker Street	2	$5,269,000
23 Whampoa Street	2	$6,826,000
25 Whampoa Street	2	$4,802,000
27 Whampoa Street	2	$4,592,000
27A Whampoa Street	2	$4,404,000
29 Whampoa Street	2	$4,833,000
81  Baker Street	3	$5,165,000
23 Whampoa Street	3	$6,695,000
25 Whampoa Street	3	$4,956,000
27 Whampoa Street	3	$4,265,000
27A Whampoa Street	3	$4,315,000
29 Whampoa Street	3	$4,739,000
81  Baker Street	4	$5,062,000
23 Whampoa Street	4	$6,233,000
25 Whampoa Street	4	$4,857,000
27 Whampoa Street	4	$4,644,000
27A Whampoa Street	4	$4,231,000
29 Whampoa Street	4	$4,644,000
81  Baker Street	5	$4,709,000
23 Whampoa Street	5	$6,428,000
25 Whampoa Street	5	$4,757,000
27 Whampoa Street	5	$4,322,000
27A Whampoa Street	5	$4,146,000
29 Whampoa Street	5	$4,322,000
81  Baker Street	6	$4,525,000
23 Whampoa Street	6	$5,725,000
25 Whampoa Street	6	$4,355,000
27 Whampoa Street	6	$4,368,000
27A Whampoa Street	6	$4,273,000
29 Whampoa Street	6	$4,368,000
81  Baker Street	7	$4,348,000
23 Whampoa Street	7	$4,774,000
25 Whampoa Street	7	$4,030,000
27 Whampoa Street	7	$3,789,000
27A Whampoa Street	7	$4,179,000
29 Whampoa Street	7	$3,789,000
	Sub-total:	$203,044,000
	Total:	$329,873,000

22.  The corresponding pro rata shares of the live respondents’ unit are as follows:

R	Property owned by live respondents	EUV	Pro Rata Share of EUV
R3	1/F, No 23 Whampoa Street	$6,962,000	2.111%
R4	5/F, No 23 Whampoa Street	$6,428,000	1.949%
1st named R7	Half share of 1/F, No 29 Whampoa Street	$2,464,000	0.747%

WHETHER DEVELOPMENT OF THE LOT IS JUSTIFIED DUE TO “AGE” AND/OR “STATE OF REPAIR” OF THE BUILDING

23.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that: -

(i) the redevelopment is justified due to age or state of repair of the existing development on the lot; and

(ii)   the applicant had taken reasonable steps to acquire all the undivided shares in the lot (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

24.  For the age and state of repair requirements, the applicant adduced expert evidence of Mr Wong Chi Ming (“Mr CM Wong”) of CM Wong & Associates Limited, both a structural engineer and a geotechnical engineer, and Mr Wong Wing Cheung Dennis (“Mr Dennis Wong”) of Prudential Surveyors International Limited, both a building surveyor and a structural engineer.  There is no expert evidence to the contrary in this connection. 

25.  Mr CM Wong conducted a structural survey of the Buildings and prepared a Structural Assessment Report dated 15 January 2019.  Mr Dennis Wong conducted a condition survey and prepared a Condition Survey Report in 16 January 2019.  Having considered the evidence of Mr CM Wong and Mr Dennis Wong, I am satisfied that redevelopment of the Buildings is justified due to their poor state of repair and the disproportionate costs of repair and maintenance.  Although regular repair could extend the life of the Buildings, repair costs will increase with time.  Further, I opine that maintenance can bring about a modest improvement only to the existing condition, and each of the Buildings would remain a sub-standard one.  I am also satisfied that redevelopment of the Buildings is justified due to the age of the Buildings.  These 62-year old Buildings are in a poor condition and have in fact come to the end of their design life.  Their design has become obsolete over time in many aspects both physically and functionally and has failed to conform to modern standards and requirements in many material respects.

Whether the Applicant Has Taken Reasonable Steps

26.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lots under section 4(2)(b) of the Ordinance.

27.  The applicant has made the following offers to the 3 live respondents for acquiring their properties. The applicant has not received any reply:

	Pre-application offer	Post-application offer	EUV as at 27 June 2017 as assessed by Mr CW Wong	Proportionate share in the redevelopment value (“RDV”)of $496,000,000 as assessed by Mr CW Wong
Date of Offer	5 July 2017	16 January 2019
R3	$9,470,000	$11,000,000	$6,962,000	$10,468,126
R4	$8,750,000	$10,150,000	$6,428,000	$9,665,198
1st Named R7	$3,355,000	$3,900,000	$2,464,000	$3,704,892

28.  Section 4(2)(b) of the Ordinance stipulates that:

“the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).” (emphasis added)

29.  In Million Mate Ltd and Others v Wong Chi Yu and Others, LDCS 1000/2014 (unreported, dated 26 September 2016), the Tribunal in para stated that:

“The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lot under section 4(2)(b) of the Ordinance. However, this obligation is not a mandatory requirement for the applicants in respect of missing owners.” (emphasis added)

30.  Ms Ngai, counsel for the applicant, submits that the applicant had taken reasonable steps to acquire the remaining undivided shares of the Lots for the following reasons:

(1)   According to section 4(2)(b) of the Ordinance and the Tribunal’s decision in Million Mate Ltd and Others v Wong Chi Yu and Others above, the applicant is no longer obliged to negotiate with R3, R4 and 1^st named R7 to purchase their undivided shares after it was confirmed that they were missing.

(2)   Nonetheless, the applicant made the post-application offers on 16 January 2019 to R3, R4 and 1^st named R7. If the Lots should be sold in the end by virtue of a compulsory sale order at the price equivalent to the RDV of $496,000,000 as at 14 January 2019 assessed by Mr CW Wong, R3, R4 and 1^st named R7 would receive 5% less than the prices offered by the applicant. In addition, the prices offered to R3, R4 and 1^st named R7 in the post-application offers are higher than the respective EUV of their properties assessed by Mr CW Wong. It is submitted that the applicant has taken reasonable steps which are more than fair, reasonable and necessary in acquiring the properties owned by the missing R3, R4 and 1^st named R7.

(3)   The prices offered by the applicant in the pre-application offers on 5 July 2017 were also higher than the respective EUV of the properties owned by R3, R4 and 1^st named R7 assessed by Mr CW Wong.

31.  Ms Ngai further submits that Mr CW Wong in his report dated 15 January 2019 opined that the RDV of the Lots as at 14 January 2019 was $496,000,000. She submits that the date of valuation is fairly close to the date of hearing and therefore, the assessed RDV of $496,000,000 can safely be adopted as the reserve price for sale of the Lots.

32.  Notwithstanding the above, in assessing the reasonableness of the offers, there is the following guidance from Ribeiro PJ of CFA in Capital Well[3] at [33] and [36]:-

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

33.  I consider that the applicant’s offers, which had considered the merged site value of the Lots as a whole, had reflected the then RDV attributable to the units and were based on professional valuation, do fall within a range of what may broadly be regarded as fair and reasonable. In any event, there is no evidence before this Tribunal that Mr CW Wong’s assessments were faulted.

34.  I am satisfied that the applicant had taken reasonable steps to acquire all the undivided shares of the Lots.

RESERVE PRICE FOR THE AUCTION

35.  Basically, Mr CW Wong adopted the residual method to assess the RDV of the Lots at $496,000,000 (ie an accommodation value of $105,460/sq m).   This is done by deducting development costs (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed optimum development.

36.  Mr CW Wong opined that the optimal development on the Lots would be a 23-storey commercial/residential composite development with a retail shop on ground floor and first floor.  Details of the hypothetical development and residual valuation were set out in Enclosure 22 of his Supplemental Report (Bundle D/207).  Details of retail and domestic comparables with adjustments were set out in Enclosure 16 (Bundle D/182) and Enclosure 19 (Bundle D/197) respectively.   Mr C Chan also adopted the Development Cost Pro-forma promulgated by the Hong Kong Institute of Surveyors to facilitate consideration of construction costs in land value assessments in Enclosure 23 (Bundle D/212).   

37.  There is no evidence to contradict his valuation and I adopt therefore $496,000,000 as the reserve price for the auction.

TRUSTEES

38.  The applicant proposes to appoint Mr Chow Wing Kin, Anthony and Ms Chow Suk Han, Anna who are partners of Messrs Guantao & Chow as the sale trustees.  Based on the information on their letter dated 3 January 2019, the proposed trustees also intend to appoint Messrs Michael Cheuk, Wong & Kee to act as the solicitors of the trustees/vendors in the sale of the Lot for handling the sale and discharging the duties imposed on the trustees under the Ordinance. I am satisfied that Mr Chow Wing Kin, Anthony and Ms Chow Suk Han, Anna are proper persons to be appointed. Their proposed remuneration at the rate of $5,500 per hour(exclusive of disbursements and fees payable to consultants) as mentioned in the letter dated 3 January 2019 is also reasonable and hereby allowed.

PARTICULARS AND CONDITIONS OF SALE OF THE LOT

39.  Mr Ngai has submitted a set of draft particulars and conditions of sale by public auction for my consideration[4]. While I understand these are the usual terms used for compulsory sale, I approve the draft particulars and conditions of sale accordingly.

CONCLUSION AND ORDERS

40.  By reasons of the aforesaid, I am satisfied that the redevelopment of the Lots is justified due to the age and state of repair of the Buildings; and the applicant has taken reasonable steps to acquire the undivided shares of the Lots. This Tribunal is also satisfied that the value of the minority owners’ units as assessed in the Application is not less than fair and reasonable, and not less than fair and reasonable when compared with the value of the applicant’s properties as assessed in the Application.  This Tribunal now makes the following orders:

(i) All the undivided shares in the Lots, the subject of the Application, be sold by way of public auction for the purposes of redevelopment of the Lots under the Ordinance;

(ii) Mr Chow Wing Kin, Anthony and Ms Chow Suk Han, Anna nominated by the applicant be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lots; and the Trustees be authorized to charge such remuneration for their service in accordance with the terms set out in the letter from Messrs Guantao & Chow dated 3 January 2019;

(iii) For the purposes of the sale of the Lots by public auction,

(a)   The sale of the Lots be on particulars and conditions of sale the same or substantially the same as the set of draft particulars and conditions of sale submitted to the tribunal initialled and approved by me;

(b)   The reserve price of the Lots be set at HK$$496,000,000;

(c)   Subject to further extension that the Tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots be completed and made fit for occupation within a period of six (6) years after the date on which the purchaser of the Lots becomes the owner of the Lots;

(iv) The EUVs of all the units in the Buildings as at 27 June 2017 assessed by Mr CW Wong should be adopted for the apportionment of the proceeds of sale of the Lots in accordance with section 10(3) and Part 3 of Schedule 1 of the Ordinance.

(v) The applicant do publish notices once in a Chinese landguage newspaper (and in the Chines language) and once in an English newspaper (and in the English language) circulating generally in Hong Kong within 7 days from the date of the sealed judgment to be made herein by the Tribunal informing R3, R4 and the 1^st named R7 and all persons claiming to the owners of the Lots:

(a) that the Tribunal has made an Order for sale of the Lots; and

(b) where and the times during which a copy of the Order for sale to be made herein be obtained.

(vi) There be liberty to the applicant, the respondents and the Trustees to apply for further directions.

COSTS

41.  I make a costs order nisi that there be no order as to costs in respect of the Application.